Merger Pits Mysterious Tsinghua Unigroup vs. MediaTek

It's important to note that Tsinghua Unigroup is paying a premium to buy both Spreadtrum and RDA.

Tsinghua Unigroup's acquisition of Spreadtrum is a $1.78 billion deal, while RDA is selling itself to Tsinghua Unigroup for about $910 million. The $18.50 per share deal announced by RDA earlier this week represents a premium of 5.5 percent to RDA's Friday close of $17.53 on the Nasdaq.

The question is, then, how is Tsinghua Unigroup financing all these deals.

Another Chinese industry source said, "The notable thing about Tsinghua Unigroup is that it has a market cap of $820 million, less than what they proposed to RDA." He suspects that the real buyer of RDA is "not Unigroup, but a $2-$3 billion fund which is related to Unigroup." He then added, "That's the beauty of China's state-owned public companies: there is nothing transparent."

The Tsinghua Unigroup's website shows that the group has its hands in various fields ranging from information technology, energy/environment, science of life, and science of materials to occupational education, finance services, international trade, and real estate.

Pure financial play Those who see Tsinghua Unigroup's acquisitions as "a pure financial play" pose a three-step scenario. First, the consolidation of China's two leading fabless chip companies (Spreadtrum and RDA are currently both public companies traded in Nasdaq) will help them both survive before the two companies get clobbered by MediaTek. Second, by going private again under the umbrella of Tsinghua Unigroup, the two companies will gain more leeway in business development -- in addition to access to the IP portfolio of Tsinghua Unigroup and Tsinghua University. Third, the new Spreadtrum, consolidated with RDA under Tsinghua Unigroup, will "go public in the near term," the sources said. Tsinghua Unigroup won't waste time making a big financial gain by doing so, they added.

Complementary Where everyone agrees is about the complementary roles RDA and Spreadtrum can play under the new structure.

One Chinese semiconductor industry observer explained, "Spreadtrum is weak in everything except TD-SCDMA, while RDA is strong in RF. Both are weak in application processors." Further, he added, "Spreadtrum's IC R&D is weak, but strong in software. Meanwhile, RDA is very strong in IC R&D, but has no real software development." As a result, combining these two "means doomsday for Allwinner and Rockchip," he noted, because Spreadtrum and RDA could ramp up tablet application processor efforts.

The Chinese industry's expectation is that the final entity (new Spreadtrum-RDA) will focus more on new wireless technology R&D, while they will spend less time competing in a declining low-end market. As for the market in feature phones for GSM, the serious competition comes down to just MediaTek and Spreadtrum, they explained.

Asked about the latest shopping spree by Tsinghua Unigroup, Will Strauss, president of Forward Concepts (Tempe, Arizona), noted that he knows almost nothing about Tsinghua Unigroup. But he added, "Actually, if you wanted to create a China-based company that could (with a lot of work and a lot of money) someday rival Qualcomm, Spreadtrum and RDA are the two companies that I would pick."

This is just the start of a consolidation that has been needed for some time.

In the U.S. our private equity, Wall Street and hungry execs drive this sort of thing to create Broadcoms and Qualcomms. It will be a Harvard Busienss review case study some day to see how well or poorly China's less capitalistic machinery performs on this task.

True, many aqusitions fail...but sometimes they work...you get either some technology, or some good people, or both...and in the worst case the execs have something to do ;-)...so they can justify their high salaries!

I think we need to take a look at this merger in China context. At a time when Taiwan's MTK is beating China fabless companies at their own game, it's understandable that China wants to see a stronger player than hundreds of small companies nibbling at the low end market.

BTW, Isn't Taiwan doing a pretty good job getting its act together with the MediaTek/Mstar merger, too? It would be interesting to hear stories about any progress on that front and the outlook for further consolidation in Taiwan where there is also the trend to many small companies.

This is taking far too long. I wonder if China is playoing politics. Pushing its colnsolidation forward while holding Taiwan's back. I may be giving China's bureaucracy credit for being more organized than it reall is!

But in reality, I suspect that MTK has accomplished half its mission: By presenting itself as the CE chip giant of the future in the global market, it already killed off a lot of potential competitors, I believe.